Question 1

For a capital intensive,automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales.

Accepted Answer

This is because a capital intensive, automated company will have higher fixed costs due to the investments in machinery and technology. Therefore, the break-even point - the level of sales at which the company starts making a profit - will be higher. Additionally, since the margin of safety is the difference between actual sales and the break-even point, it will be lower in a capital intensive, automated company as a result of the higher break-even point.

Question 2

The degree of operating leverage in a company is largest at the break-even point and decreases as sales rise.

Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in sales. At the break-even point, where sales equal total costs and operating income is zero, a small increase in sales can lead to a large increase in operating income, resulting in a high DOL. As sales continue to rise beyond the break-even point, the DOL decreases as fixed costs become a smaller proportion of total costs and the impact of changes in sales on operating income becomes less pronounced.

Question 3

The impact on net operating income of a given dollar change in sales can be computed by multiplying the contribution margin by the dollar change in sales.

Accepted Answer

False

Question 4

Incremental analysis is generally the most complicated and least direct approach to decision making.

Accepted Answer

Incremental analysis involves analyzing the costs and benefits of each alternative option to determine which one is the most profitable. This approach can be complicated because it requires a detailed calculation of all the incremental costs and benefits associated with each option, and the results may not always be clear or straightforward. Therefore, incremental analysis is often considered the most complicated and least direct approach to decision making.

Question 5

The margin of safety in dollars equals the excess of actual sales over budgeted sales.

Accepted Answer

The margin of safety in dollars equals the excess of budgeted sales over actual sales. It represents the amount by which sales can decrease before reaching the break-even point.

Question 6

If sales volume decreases,and all other factors remain unchanged,the contribution margin ratio will decrease.

Accepted Answer

The answer of If sales volume decreases,and all other factors...

Question 7

Reynold Enterprises sells a single product for $25.The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales.The company's net operating income will increase by $10 if one more unit is sold.

Accepted Answer

If one more unit is sold, the revenue will increase by $25 (selling price), the variable expense will increase by $15, and the contribution margin (revenue - variable expense) will increase by $10. Since the fixed expense per unit is $5, the entire $10 increase in contribution margin will go towards increasing net operating income. Therefore, selling one more unit will increase the company's net operating income by $10.

Question 8

As total sales increase beyond the break-even point,the degree of operating leverage will decrease.

Accepted Answer

This is because as sales increase beyond the break-even point, fixed costs become a smaller proportion of the total costs, leading to a decrease in the degree of operating leverage.

Question 9

All other things the same,if the fixed expenses increase in a company then one would expect the margin of safety to increase.

Accepted Answer

The answer of All other things the same,if the fixed...

Question 10

All other things the same,an increase in variable expense per unit will reduce the break-even point.

Accepted Answer

An increase in variable expenses per unit will actually raise the break-even point, as the company will need to sell more units to cover those added expenses.

Question 11

All other things the same,an increase in total fixed expenses will increase the break-even point.

Accepted Answer

This is because the break-even point is the level of sales at which total revenue equals total costs, and an increase in fixed expenses will increase the total costs, meaning that more sales will be required to reach the break-even point.

Question 12

At the break-even point,the total contribution margin and fixed expenses are equal.

Accepted Answer

This is because at the break-even point, a company has not made a profit or a loss, meaning that its total revenue is equal to its total expenses. The total revenue is made up of the contribution margin (selling price per unit minus variable cost per unit) multiplied by the number of units sold, while the total expenses are comprised of fixed expenses and variable expenses. Therefore, when total contribution margin is equal to fixed expenses, the company has reached its break-even point.

Question 13

One way to compute the total contribution margin is to deduct total fixed expenses from net operating income.

Accepted Answer

The formula for total contribution margin is total sales revenue minus total variable expenses. Net operating income is calculated by deducting both fixed and variable expenses from total sales revenue. Therefore, deducting total fixed expenses from net operating income would not give the total contribution margin.

Question 14

All other things the same,in periods of increasing sales,net operating income will tend to increase more rapidly in a company with high fixed costs and low variable costs than in a company with high variable costs and low fixed costs.

Accepted Answer

In periods of increasing sales, a company with high fixed costs and low variable costs will see a larger increase in net operating income because their fixed costs remain the same while sales increase. On the other hand, a company with high variable costs and low fixed costs will see a smaller increase in net operating income because their variable costs increase proportionally with sales.

Question 15

The unit sales volume necessary to reach a target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin per unit.

Accepted Answer

This formula is known as the break-even analysis formula. It helps determine the number of units that must be sold to cover all costs and reach a desired profit level.

Question 16

All other things the same,a reduction in the variable expense per unit will decrease the break-even point.

Accepted Answer

If the variable expense per unit is decreased, it means that the cost per unit to produce the product is lowered. This will result in a lower break-even point as the company will need to sell fewer units to cover their fixed costs and turn a profit.

Question 17

If two companies produce the same product and have the same total sales and same total expenses,operating leverage will be higher in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

Operating leverage is the degree to which a company uses fixed costs as opposed to variable costs in its production process. Higher proportion of fixed expenses results in higher operating leverage, which means that changes in sales revenue will have a greater impact on profits. Therefore, if two companies produce the same product and have the same total sales and expenses, the company with a higher proportion of fixed expenses will have a higher operating leverage.

Question 18

In two companies making the same product and with the same total sales and total expenses,the contribution margin ratio will be higher in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

Contribution margin ratio is calculated by subtracting variable expenses from total sales and then dividing by total sales. In a company with a higher proportion of fixed expenses, there will be lower variable expenses, leading to a higher contribution margin ratio.

Question 19

One assumption in CVP analysis is that the number of units produced and sold does not change.

Accepted Answer

CVP analysis assumes that the number of units produced and sold can change based on various factors such as changes in demand, pricing strategy, production capacity, etc.

Question 20

On a cost-volume-profit graph,the revenue line will be shown below the total expense line for any activity level above the break-even point.

Accepted Answer

The answer of On a cost-volume-profit graph,the revenue line will...

Quiz 6: Cost-Volume-Profit Relationships